How’s Your FU Fund?
A few months ago, a friend of mine asked if I’d have a look at some paperwork that he didn’t understand in relation to his pensions.
What does it all mean?
My friend is a degree educated, high-earning senior manager of a major company. He is very smart and used to dealing with complex projects and managing remote teams, so he’s certainly not stupid. Despite all his skills and experience, he found information about the various pensions that he’d accumulated over 30 years of working, confusing, unclear and overwhelming.
What I thought would take me 30 minutes, ended up taking me 3 hours!
My friend had four personal pensions, one from his existing employer and three from previous employers. One had very high charges, another was invested in a poorly performing managed fund, and another had been taken over by another provider. In total these plans were worth about £400,000.
My friend also had a defined benefits scheme. This means that when he reaches age 63 (4 years earlier than when he receives his State pension entitlement) he would receive a guaranteed pension of about £10,000 per annum. The pension would be increased by inflation each year both before and during when it is paid. And should my friend die at any stage, his wife would receive a pension income of 50% of that amount i.e. currently £5,000 per annum. He could give up his guaranteed benefits in return for a one off cash transfer payment of £150,000.
I pointed out to my friend that he needs to investigate whether he should transfer his three old personal pensions to a low-cost alternative or to his existing workplace scheme. At the same time, he should revise the investment strategy to reflect his risk profile. His risk profile will depend on how long it will be before he starts to draw on the funds and his wider financial situation (for example does he have or expect to have other sources of income and capital by the time he stops work).
To replicate the guaranteed pension benefits by buying an annuity would cost over £340,000, so the £150,000 transfer payment offered doesn’t look very good value for money. But to work out whether to retain or transfer this benefit will need a careful look at my chum’s wider financial situation and objectives.
Getting help
Just like when you have a job at home that is beyond your own abilities and is important to get right, I suggested that my friend consult a financial adviser to help him review his plans on the basis that their fee (a fixed or hourly fee charging adviser is unlikely to be more than £1,500) would more than be paid for by ongoing savings in plan charges, improved potential for investment returns, simplification of his pension arrangements and much greater clarity of what resources he has to help fund life after work.
Are you a pensions magpie?
If you’ve worked for more than one employer, there is a good chance that you have also got ‘old’ pension arrangements scattered around and which are out of sight and so out of mind. But knowing what charges you are paying, what you are invested in, and how the money will help you fund your lifestyle after you stop work - what some people colloquially describe as FU money, because you have enough money to enable you to make paid work optional - is essential to a good outcome.
If you’ve lost touch with your old employer and associated UK based pension benefits you can trace these using the government’s free tracing service, which you can access here.
Don’t forget your state pension
The maximum full new UK state pension for people retiring from now on is currently about £8,800 per annum (£168.60 per week), as long as you’ve made (or been credit with) National Insurance contributions for at least 35 years. You can accrue entitlement in years in which you registered as a carer or claimed child benefit for children under 12.
Any year in which you missed a contribution can be purchased as long as you do this within 6 years of that year. The cost is usually good value for money, and you can find out if you’ve missed any contributions, as well as lots of other information, by visiting the government website here.
Get your free money
All employees are entitled to a pension contribution from their employer of at least 3% of their wages (after a starting threshold), but some employers pay more, whether or not your also contribute more than the minimum of 4% of wages (above a starting threshold), with the government also contributing 25% of what you contribute. So, 4% becomes 5%, and 8% becomes 10%.
Employer contributions and government bonuses on your personal contributions are effectively free money, so for most people it makes sense to get all the money you can. And the earlier you do this, together with a sensible investment strategy, the bigger your eventual fund will be.
The only downside with UK pension plans is that you can’t access them until you are at least 55. The good news is that you can’t access them before you are 55.
So, take a great interest in your employer’s pension plan so that you make your FU fund capable of helping you make paid work optional.
MARCH 2, 2020